$12 Billion Deal Will Put Google In Mobile Market

Published: August 16, 2011

Google made a $12.5 billion bet on Monday that its future - and the future of big Internet companies - lies in mobile computing, and moved aggressively to take on its arch rival Apple in the mobile market.

The Silicon Valley giant, known for its search engine and Android phone software, rattled the tech world with its announcement that it would acquire Motorola Mobility Holdings, allowing it to get into the business of making cellphones and tablets.

The acquisition, Google's largest to date and an all-cash deal, would put the company in head-to-head competition with its own business partners, the many phone makers that use Android software, as well as with Apple.

The deal, which requires regulatory approval, would also give Google a valuable war chest of more than 17,000 patents that would help it defend Android from a barrage of patent lawsuits.

''Computing is moving onto mobile,'' Larry Page, Google's chief executive, said in an interview. ''Even if I have a computer next to me, I'll still be on my mobile device.''

The effect of a Google-Motorola Mobility merger on consumers is unclear. But in the past, Google has shaken up the mobile industry by pushing cellphone carriers to open up their networks, and by licensing its Android system at no charge, increasing competition. With the Motorola deal, analysts said, Google may be able to accelerate innovation in smartphones and tablets.

''For Google, it's important for them to make sure that the mobile space is not dominated by one company, that being Apple,'' said Steve Weinstein, an analyst at Pacific Crest Securities. By acquiring Motorola, he said, they ''can drive down costs and create a product that is pioneering with Google services around it.''

The proposed deal would have ramifications across the tech industry, giving strength to Motorola at a time when Research in Motion and Nokia are faltering.

Google said it would continue to license its Android system to other smartphone makers, like HTC, Samsung and LG. ''Many hardware partners have contributed to Android's success, and we look forward to continuing to work with all of them,'' wrote Mr. Page in a company blog post announcing the deal.

Nonetheless, while many of Google's partners issued positive statements on Monday, analysts suggested that the acquisition would create tension because Motorola would be in an obviously favored position. That could push other phone makers into the arms of Microsoft, which offers a rival operating system.

''If you woke up today and you are one of Google's hardware partners, the hair just set up on the back of your neck,'' said Colin Gillis, an analyst with BGC Partners. ''If you're an Android partner, you may start considering the Windows platform.''

Mr. Page addressed those concerns by saying that Motorola would effectively operate as a stand-alone business. Sanjay Jha, the chief executive of Motorola Mobility, who has been responsible for turning the company around, will remain as the unit's top executive.

Federal regulators are already investigating Google's dominance in several areas of its business, and the planned merger will prompt additional antitrust review. But legal experts said it seemed unlikely that the deal would be blocked because the two companies are in separate, if related, businesses so a combination would not increase Google's share of either market.

Phones running the Android system have become increasingly popular, accounting for 43.4 percent of smartphones sold in the second quarter, according to Gartner research. But many customers have complained that the phones can be confusing to use.

That is because Google works with 39 phone makers that use different versions of Android across their platforms, resulting in variable performances, said Richard Doherty, research director for Envisioneering Group, a market research and consulting firm.

Apple, by contrast, controls its entire product - device and software. With the Motorola acquisition, Google, too, could exert greater control over its products.

But it is far from clear that Google, a $179 billion business largely built on sophisticated search algorithms and online advertising, can transform itself into a device maker. The business is costly, and the margins are slim, said Jordan Rohan, an analyst with Stifel Nicolaus.

''If you have the best-selling phone, you can make a lot of money,'' he said. ''What's not clear to me is whether phones that sell a few million units make a lot of money.''

The chief of Android, Andy Rubin, even proclaimed, in 2009, that the company was simply ''not making hardware.''

By becoming a phone maker, Google may be able to increase its clout with wireless carriers, which control pricing and distribution of cellphones.

''This is an opportunity for Google to jumpstart the market, in pricing and innovation,'' said Avi Seidmann, an information systems professor at the University of Rochester.

Google's deal for Motorola comes just weeks after it lost a bid to a consortium led by Apple and Microsoft for 6,000 patents from Nortel, a Canadian communications company that filed for bankruptcy in 2009. For Google, which faces an increasing number of patent infringement claims against its Android system, the loss was a major blow.